Definition: Fossil Fuel Market Failure

Climate Change is a big problem.

It is so big, in fact, that individual action—while necessary—is not enough to stop the dire predictions of a warmer world from becoming reality.  It turns out that as Americans, only about 40% of our 24 metric ton personal carbon footprint is due to the direct emissions of household energy use and transportation.  The other 60% is embedded into the products we buy, the entertainment we enjoy, and our government’s activities – all of which are largely still rooted in the use of fossil fuels.

oil - production fossil fuels
Oil Drills in California providing more oil for our nation

Knowing this, it becomes clear that it is important to not only re-think our personal practices, but to vote for policies that require our government and industries to do the same. We cannot allow our government and market to continue to rely on fossil fuels.  The reason is simple…

The fossil fuel industry is what economists call a “Market Failure”

This is because the price of fossil fuels does not accurately represent to cost of their production.

While the price does reflect the cost of drilling and refining the fuels, it does not account for the cost of negative externalities. A negative externality is defined as “a cost that is suffered by a third party as a result of an economic transaction.”  For fossil fuels this includes everything from the negative impacts of habitat destruction in the acquiring of raw materials to the costs of cleaning up from natural disasters worsened by climate change.  Since GHG emissions from fossil fuels are the major contributor to climate change, it could be argued that all damage due to climate change is a negative externality of the fossil fuel industry.

A map of global air pollution - one of the many negative externalites due to the fossil fuel industry
A map of global air pollution – one of the many negative externalites of the fossil fuel industry

As one climate scientist put it, “The fossil fuel industry is the only industry that isn’t required to clean up its own waste.”

break free

Although there is much public support for switching to alternative fuels, industry and government have remained reluctant to adopt the change

If the fight against climate change is to gain any true ground, it is imperative for the cost of GHG emisions to be accurately represented in our economic and market sectors. As long as these fuels are marketed at artificially cheap prices, they will continue to appear to be the most economical option – further entrenching our society in its dangerous dependence on the fuels that have us currently releasing 14.7 trillion pounds of CO2e annually.

A big part of the solution to this “market failure” is widely agreed to be found in Carbon PricingCarbon Pricing is exactly what is sounds like—a way to put a price on CO2e emissions. There are two major approaches to Carbon Pricing: Carbon Tax and Carbon Trading.

To learn more about a Carbon Tax, click here.

To learn more about Carbon Trading, click here.

Whichever of these policies you favor, it is important to encourage our government, local and federal, to employ carbon pricing policies and reduce emissions of GHGs.

Also remember that each purchase you make acts as a vote in the market world.  Buying sustainable products helps make your voice heard in industry and encourages producers to make more sustainable options available.

Part 4 in a series on sustainability definitions. Click here to read other posts in this series.

 

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